RESPONDENTS: Key Stats*
– 191 corporate respondents
– 71 public respondents
– $1.9TUSD total assets under management
*An additional 48 U.S. responses were gathered from multi-employer pensions, insurance companies and non-profit organizations.
In response to the expectations of a low return/high volatility environment, institutional portfolios have become overly complex. Now that markets have turned around, investors are confident about meeting their objectives—and are left wondering whether these complicated investments are worth the risks and the fees charged.
With favorable markets and lower-than-average volatility since 2012, institutional investors are now focused on closing funding gaps. Contrary to other parts of the world, where preservation of assets is paramount, U.S. pension executives are aiming for growth in 2014, according to the bi-annual Global Institutional Investor Survey by Pyramis Global Advisors.
However, there are also areas of disconnect that bear watching. The complexity of institutional portfolios—specifically when it comes to alternative investments—appears to have exceeded investor knowledge and comfort levels. A majority of respondents, both public and corporate, report that they do not fully understand all the risks in their portfolios, even as some public plan sponsors expect to move more assets into alternatives. Alternatives, such as hedge funds and private equity, are complicated and carry unique risks, and many investment committee and board members must rely on outside resources (e.g., consultants) to fully understand the risks to the plan. The U.S. reliance on outsourced investment expertise stands in sharp relief to the rest of the world, where pension schemes leverage in-house investment professionals as their primary source of investment innovation. “Today, some investors appear to be less comfortable with the risks, complexities, and costs associated with their alternatives allocation,” notes Pam Holding, chief investment officer for Pyramis Global Advisors. “While investors may appreciate the diversification benefits alternatives can provide, others are beginning to question their value relative to the fees charged,” she continues.
“Today, some investors appear to be less comfortable with the risks, complexities, and costs associated with their alternatives allocation. While investors may appreciate the diversification benefits alternatives can provide, some are beginning to question their value relative to the fees charged.”
U.S. Corporate Pensions
Goals and Objectives
U.S. pension executives have had fair investment winds at their backs for several years now, and it shows. Eighty-four percent of U.S. respondents say they are comfortable they will achieve their return targets over the next five years, up from 71% in 2012. So what is keeping today’s pension investment officer up at night? In the U.S., institutions are most concerned about their funded status. It was the top concern for 28% of respondents, followed by risk management at 20%.
While U.S. corporate plan sponsors may have been hoping for growth in 2012, by 2014 it became their top objective. More than one-third of respondents said their primary investment objective has changed over the last five years, and for most that meant a move away from capital growth to funded status growth. Accordingly, both capital growth and capital preservation lagged in this year’s priority list, with 21% and 11% of respondents, respectively, choosing these as their top priorities.
Outsourcing investment innovation
We may be at a point where asset allocation has outpaced education. Only 41% of U.S. pension fund executives feel they fully understand all the risks in their portfolio. As investments and strategies have grown more complex, U.S. corporate investment committees have come to rely more on outside investment expertise to help them design and implement their investment strategy. When we asked pension investment executives where most of their new investment ideas came from, 53% said “all or mostly external” sources. “In the U.S., we see a trend towards outsourcing and unconstraining, while in other parts of the world our data suggest a move towards more in-sourcing and constraining as a way to manage risk and improve returns.” Holding observes.